The free market fantasy

Jacob Hacker
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23 April 2014

Where organisations representing the broad concerns of citizens have more weight, markets as well governments deliver benefits that are more broadly shared

When I first started speaking about ‘Predistribution’ a few years back, I expected to be attacked, and I was. My call for improving markets rather than just cleaning up after them was immediately criticised for a variety of often contradictory reasons. It was too wonky, too vacuous, too aggressive, too timid, too familiar, too much of a break with the past.

Frankly, however, I never expected it would be dismissed as ‘1970s-style socialism,’ as UK Prime Minister David Cameron suggested in his keynote address to the Conservative Party last year. This stale dismissal is an indication of how little many of today’s leaders have learned from economic theory or history, especially the history of the past few years. After the worst financial crisis since the Great Depression, can we really believe that markets are infallible? Can we really believe that leaders should wash their hands of responsibility for clear failures of the market that make all of us – and especially those of us with the least political influence – worse off? It is a fantasy to believe that successful capitalism only requires that government fix things up after the fact. If the left is to reclaim the economic high ground, it will have to bury the free-market fantasy once and for all.

1. Markets are not God-given or natural
Markets can be enormously effective, but they aren’t always and they are never self-governing. They rest on rules of the game that inevitably advantage some players and not others. The increasingly lax rules governing the financial sector, to take the most salient recent example, advantaged market players willing to take on more leverage and risk without regard to the grave systemic threats their actions posed. In the language of economics, these threats were an ‘externality’ – privatised gains, socialised losses, predictable crises. The core point of predistribution is that progressives need to think more seriously about how the rules of the market, and the measures taken to augment and support it, encourage the kinds of social outcomes that citizens value. The distortion of these rules in key areas from finance to corporate governance to energy to industrial relations hinders not just growth, but also the translation of growth into broad-based economic and social gains.

2. Powerful interests have to be countered
These distorted rules are not a coincidence. They reflect a related implication of predistribution: capitalism as well as democracy depend on broadly distributed influence and opportunities. More and more research suggests that the powerful economic interests in finance and the corporate world that have shot ahead over the last generation have in turn used their economic power to reshape markets to their advantage, or at least to fend off measures that would limit the externalities – from carbon emissions to toxic financial assets – they impose on the rest of us. It was Adam Smith, after all, who warned that unchecked merchants and manufacturers would act as an ‘overgrown standing army’ that would ‘upon many occasions intimidate the legislature,’ repressing wages and rigging policies in their favour. As the political scientist Deborah Boucoyannis has convincingly shown, Smith believed that to increase national wealth ‘profits should be low and labour wages high… land should be distributed widely and evenly, inheritance laws should partition fortunes, taxation can be high if it is equitable, and the science of the legislator is necessary to thwart rentiers and manipulators.’ We should heed Smith’s call.

3. Progressives need a new agenda for market reform
As Smith’s words suggest, progressives need to reclaim the mantle of economic efficiency and growth, but contest the wrong-headed claim that wise democratic management and supplementation of the market are at odds with these goals. The broad thrust of economic change during the twentieth century – rising incomes, longer lives, increased education, greater equality of income and wealth – reflected an effective marriage of the state and the market. This marriage has come undone over the last generation, and no progressive political leader can afford to let the divorce continue. There has to be a clear understanding of how ill-governed markets can undermine progressive goals, as well acknowledgement of the limits of simply taxing and spending more to offset ever more imbalanced economic outcomes. The French economist Thomas Piketty may be correct that a global wealth tax will ultimately be necessary to ensure that wealth inequalities do not grow so large they make a mockery of democracy. In the here and now, however, progressives need to articulate an agenda for market reform that takes seriously the political and economic constraints on the state in our current era.

4. Predistribution as a governing idea
Four themes should define a new predistributive agenda: a true commitment to equality of opportunity, embodied in universal access to affordable pre-K education and college; the encouragement of faster, more broadly shared, and more stable growth through public investment and stronger discipline of finance; a concerted campaign to expand and improve public services so that all citizens have access to a basic set of goods essential to human flourishing, regardless of income or wealth; and the fostering of countervailing power and participation through the empowerment of communities, civic organisations, and economic watchdogs, including, of course, trade unions but also collective investors (such as pension funds) and public-interest organisations (such as anti-poverty advocates).

5. Renewing organisational power bases
I have laid out how to achieve these goals in more detail elsewhere, and Policy Network has produced a series of stimulating briefs that take up the challenge. But we should not forget the larger vision: Even in this age of global competition, enormous variation exists across rich nations in the equality of wages, the basic protections that workers enjoy, the pay of senior executives, and other features of the economy that are vital to citizens’ well-being. These differences reflect not just different policies, but also the varying power enjoyed by different players in the market. And, of course, government policies reflect such power differences as well. Where organisations representing the broad concerns of citizens have more weight, markets as well governments deliver benefits that are more broadly shared.

Jacob Hacker is the director of the Institution for Social and Policy Studies and Stanley B. Resor professor of political science at Yale University

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